The Australian dollar was actively cheaper on Wednesday, losing positions it won in a few days. The upward trend of the AUD/USD was again an illusion, or rather a temporary price correction. Almost all of the higher timeframe suggests that the overall trend remains to the downside, while there is no chance for a full-scale recovery of the aussie at the moment. This picture is consistent with the fundamental background.
There are several major reasons for the weakening of the aussie, and they are all interrelated. At the forefront is the trade war between the US and China, which is still gaining momentum. Washington has prepared a new list of Chinese exports totaling $200 billion. These goods will be subject to an additional ten percent customs duty. The list is impressively various, in it about six thousand items. We are talking about food, tobacco products, chemical products, furniture and so on. The new list even included pet food. The new tariffs will come into force in two months – during this time, Americans will conduct "public hearings" on this issue, although, as a rule, they are of a formal nature and do not change the decision already made.
It is worth recalling here that on July 6, the US introduced a 25% duty on imported goods from China for $34 billion, although this list of goods will be expanded by another 16 billion in two weeks, that is, to 50 billion. Given the "new package" of duties announced on Tuesday, it can be concluded that Trump is moving towards his final goal (or the first intermediate one), when the total value of the duties on Chinese exports will reach $500 billion.
China in its usual style condemned the actions of Washington, saying that such steps will harm not only the Chinese or American economy, but also the world economy as a whole. The Chinese press sounded more aggressive notes: with reference to unnamed sources, journalists reported that Beijing "will respond with fire to the fire", while minimizing the potential damage to their businesses. However, such publications should be treated with skepticism – they can carry a political implication for "internal use".
Another interesting fact is US trade representative Robert Lighthizer, commenting on the new duties, said that in this way Washington responded to China's inability to "change its behavior." Later, one of the representatives of the White house said to the American TV channel that the presidential administration is irritated by the behavior of the Chinese, who pursue a policy of "hidden dragon": responding in symmetrical ways, Beijing ignores Trump's threats and is not going to make concessions or compromises.
This suggests that the US-China trade war has not yet reached its apogee: the game of promotion will continue until one of the opponents raises the white flag. It is not advisable to talk about temporary guidelines in this context, because, in addition to the introduction of new duties, the White house has sufficient arsenal to continue the war. By the beginning of next year, all Chinese imports, which last year amounted to $505 billion, may be subject to additional duties. Also, do not forget about Trump's plans to significantly limit Chinese investment.
A new round of the US-China confrontation hit the commodity market. By and large, the Australian dollar followed the copper, which fell to almost an annual low, responding to recent events. In general, only last month this raw material lost almost four percent of its value. It is not surprising, because China provides almost 40% of the world demand for copper, so the trade war has a very negative impact on the price dynamics.
Industrial metals are also declining, and not only aluminum, which has shown a downward trend since May: the LMEX Metals index, which reflects the cost of six major industrial metals, fell to almost an annual low. Iron ore, a strategically important commodity for Australia, has also collapsed. To date, the cost of a ton is 62.9 dollars, while at the beginning of the year this figure was in the level of 80 dollars. Moreover, according to the forecasts of Australian experts, in the second half of the year the price may drop to $50 due to increased production and low demand from China.
Thus, the fundamental background for the Australian dollar is negative. The situation in the commodities market will influence not only the dynamics of the AUD/USD, but also on the tone of the rhetoric of members of the Reserve Bank of Australia. In general, the RBA takes a cautious stance – experts do not expect any action from the regulator before the second half of 2019. But recent events may soften the central bank's position, at least in the context of verbal interventions.
From the technical point of view, the pair is currently near a strong resistance level of 0.7400 (the average Bollinger Bands line, which coincides with the Tenkan-sen line on the daily chart). If the price is fixed under the above-mentioned mark, the Ichimoku Kinko Hyo indicator will form a bearish signal of the "Parade of lines", which will open the path to the next resistance level – 0.7325 (the lower line of the Bollinger Bands indicator on D1).
The scenario of a price correction is possible and even probable, given the uncertain position of the US dollar. But in this case, the growth of the pair is advisable to use for opening short positions: the Australian currency will remain under background pressure until the end of the US-China trade war, since the aussie is economically dependent on both China and the commodity market.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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